As with load mutual funds, you should avoid funds that charge this fee. But understand that some good mutual funds do charge a small fee for selling shares within a 3 or 6 month window.
What is happening here is that one sector of the economy is hot, like healthcare, and lots of investors are putting money into specific mutual fund. To ward off short term investors who cost the mutual fund money, the mutual fund will enact a short term trading fee.
This isn’t an issue as long as you plan to keep your investment for the long term.
#4. 12b-1 Fee
This is a fancy term for a marketing fee. Most mutual funds include this number in their management fee, but some break it out as an added fee. The fee is typically 1% or less. Most times I see it as 0.25%.
Understand that you pay this fee every year you own the fund, just like with the management fee.
For the most part, you should try to steer clear of mutual funds that charge this fee. The really good mutual funds account for marketing expenses in the management fee and still are able to keep it low.
While this isn’t a direct fee you pay, it has an impact on the fees you do pay. Turnover is another way of saying how often the management team of a mutual fund sell out of, or turns over investments.
Let’s say a mutual fund as a turnover rate of 100%. This means that at the beginning of the year, none of the stocks it owns will still be held at the end of the year. So if you are buying the mutual fund because of its exposure to Apple stock, you might want to think again because come year end, it won’t own that stock.
The higher this number, and it can be higher than 100%, the more trading the management team does. And when they trade, they incur fees which they pass along to you the shareholder. This causes the management fee you pay to increase.
At the end of the day, these are the secret costs of mutual funds. Some of these fees are required that investors pay. It is part of the process of getting a team of investment professionals to manage the mutual fund.
But this doesn’t mean you should turn a blind eye to the fees you are paying. Do your homework and pick low cost mutual funds that don’t charge a load and don’t have a lot of additional fees. The lower the fees you pay, the more your money stays invested and can grow and compound for you over time.
This article has been republished with permission from Modest Money.